Dow Tops 13,000, Logs Best 3-Day Rally in 2012

Stocks closed out a volatile week with sharp gains Friday, with the Dow crossing above 13,000 for the first time since May, amid optimism that the Federal Reserve and the ECB may provide further stimulus to prop up the global economy.

Stocks spiked in midday trading following reports that the Bundesbank President and ECB chief may be in discussions on new measures to ease the euro zone's continuing debt crisis.

The Dow Jones Industrial Average soared up 253.09 points this week, or 1.97 percent, to close at 13,075.66, crossing the psychologically-important 13,000 level for the first time since early May, led by Merck .

The S&P 500 rallied 23.31 points this week, or 1.71 percent, to finish at 1,385.97. The Nasdaq jumped 32.79 points this week, or 1.12 percent, to end at 2,958.09.

The CBOE Volatility Index, widely considered the best gauge of fear in the market, closed below 17.

All 10 S&P sectors ended in positive territory, led by health care and industrials.

Stocks spiked near session highs following a report from Bloomberg that the President of the Deutsche BundesbankJens Weidmann is in talks with ECB President Mario Draghi. Draghi's proposal may include rate cuts, bond purchases and new LTRO, according to the report. On Thursday, Draghi vowed to do “whatever it takes” to save the euro, which helped spark a global rally Thursday.

An ECB spokesperson wouldn't confirm nor deny the report but told CNBC that it was "normal" for Draghi to talk to other European central bank chiefs before they meet as members of the ECB governing council.

And earlier, German Chancellor Angela Merkel and French President Francois Hollande pledged to do all in their power to protect the euroafter discussing the latest events in the debt crisis by telephone. European shares finished higherand the euro rallied to a session highagainst the dollar on the heels of the announcement. (Read More: Did Draghi Just Give Investors an Exit Point?)

“It would help if Merkel and Hollande tied themselves to the mast of the euro, just like Draghi did," said Peter Fisher of BlackRock.

On the economic front, consumer sentiment came in slightly better than expected in July, according to the Thomson Reuters/University of Michigan's final reading. Still, the level hit its lowest this year.

And GDP expanded at a 1.5 percent annual ratein the second quarter, according to the Commerce Department said on Friday. Still, the reading marked the weakest pace of growth since the third quarter of last year.

Traders had been watching to see if the GDP report would encourage the Fed to be more aggressive at its two-day meeting next week. Some expect the Fed next week to lengthen the time frame on its forecast for extreme low rates to mid-2015, from the end of 2014. (Read More: Despite Slowing Economy, Fed Is in No Hurry to Act)

“We’re not seeing a great deal of progress on the unemployment front but we’re also not seeing deterioration,” said Natalie Trunow, CIO of equities at Calvert Investments. “There’s not necessarily a lot of pressure on the Fed to act…and there’s no sufficient pressure in the macro environment either. It would take worse set of numbers for the Fed to make new moves.”

Among earnings, Facebook pared some losses but was still down more than 10 percent after the social-networking giant posted a slowdown in revenue growth and gave no guidance, causing investors to worry over the future growth. In addition, at least four brokerages slashed their price targets on the company.

Merck reported better-than-expected quarterly earningsdespite the negative impact of the stronger dollar, with solid sales growth from its vaccines and treatments for diabetes and HIV. S&P Capital IQ raised its price target on the Dow component to $49 from $46.